Posts Tagged ‘Higher Interest Rates’

Today’s rising interest rates & trillion-dollar losses in global bond markets are prelude to what is to come,- Rising inflation with higher interest rates ending in the bursting of global government bond bubble & long awaited breakout in gold. The battle between capital & free markets is almost over; & when the bondfire has finally run its course, gold and silver will be victors.

The Fed will not raise rates for the fun of it. The Fed wants to keep inflation under control, but what the organization really wants is negative real rates. That’s where inflation is higher than nominal rates. It does the Fed no good to raise rates unless inflation is going up even faster. Yet that’s exactly when gold does its job of preserving wealth.

Gold and silver tanked in the aftermath of the US presidential election, as investors grew optimistic about Donald Trump’s plan to lower corporate taxes & boost infrastructure spending. That sent copper prices to their best weekly performance on record. Higher demand for base metals could drag silver prices higher over the long term, later to be followed by a massive rally in gold on high inflation.

Based on the 10-year TIPS market, inflation expectations recently hit 1.75%, the highest level since the summer of 2015. To the extent that rates are being driven by changing perceptions of inflation & not real rates, higher interest rates may not be an impediment for gold. Gold is potentially the more leveraged play under a scenario where inflation expectations rise faster than nominal rates.

Whatever expedients are implemented, the final outcome of the unprecedented economic contraction in the world will have to be the revaluation of gold reserves, as desperate governments of the world resort to gold to preserve indispensable international trade. The revaluation of gold does not mean that prices of goods and services will rise in tandem with the higher price of gold.

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense — perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

To mainstream financial commentators, blame for a crash is always placed on remote factors, such as China’s financial crisis, and has little to do with events closer to home. Analysis of this sort is selective and badly misplaced. The purpose of this article is to provide an overview of the economic background to today’s markets as well as the likely consequences.

The US government has a “plunge protection team” consisting of the US Treasury & Federal Reserve. The purpose of this team is to prevent unwanted stock market crashes. If central banks purchase stocks in order to support equity prices, what is the point of having a stock market? If central banks cannot properly conduct a monetary policy, how can they conduct an equity policy?

One of the biggest causes of the financial crisis is back. Lenders aren’t giving people subprime loans to buy houses anymore. They’re lending to people to buy cars & to buy stuff on their credit cards. If a big financial institution takes a big risk and it pays off, it keeps the profit. If it takes a big risk and blows up the financial system, the government will bail it out…like it did in 2008.

While both the equity rally and the commodity sell-off appear overdone, logic dictates that these trends could well continue in the face of an improving economy and rising interest rates. But at the risk of ignoring cognitive dissonance, financial markets also seem ripe for a counterintuitive move, as indicators reach extremes: commodities could rebound amid a correction in equities.

Wild swings in asset prices over the past 20 years and the associated boom-bust cycles have sparked considerable debate about how monetary policy might play a stabilizing role. In other words, thanks to Alan Greenspan, the US economy cannot function under a normalized monetary policy regime, “roughly speaking.”

Conventional wisdom says that rising rates are bad for gold prices. HSBC’s Global Research team found that gold prices have actually risen the last four times rate hikes began. History shows that gold prices also fall leading into a rate hike and generally rise, though sometimes with a lag, after the first rate hike.

Investors looking for income have turned to junk bonds. Junk bonds didn’t grow much from 2002 to 2008. But when the Fed cut rates to zero in 2008, junk bond issuance began to take off & the number of junk bond issues soared 483% between 2008 and 2014. Today, some of the savviest investors are starting to place bets against junk bonds. Exit junk bonds today.

Ian Spreadbury, who oversees the investment of over £4 billion of clients’ money in bond markets for Fidelity, said, “Systemic risk is in the system and as an investor you have to be aware of that.” To deal with these risks Spreadbury advocates a well-diversified portfolio. Cash should be spread out in different banks & that investors hold gold and silver.

Investing in natural resources and precious metals is attractive today because the sector is so much cheaper than it was three years ago. Many of the stocks are trading at a 90 percent discount to their prices in 2011. For a contrarian investor, I believe that we are seeing a historic opportunity now.

You may find it striking that each downturn has been preceded by the same thing: A surge in the growth of money. In other words, the bust or a sharp downturn always followed an unsustainable credit-induced boom – No matter what those in charge thought they were doing.

Families will have less money to spend thanks to much higher health insurance premiums under Obamacare, more tax increases, higher interest rates on debt & cuts in government welfare programs. If the US consumer is tapped out, how will the economy possibly improve in 2014?

Just one day after President Barack Obama signed into law a bipartisan deal to end the government shutdown and avoid default, the U.S. debt surged a record $328 billion in one day, the first day the government was able to borrow money.